Chapter 16 - Commercial & Investment Properties

Income Statement

1. Gross Potential Income 2. Effective Gross Income 3. Expenses 4. Net Operating Income 5. Before Tax Cash Flow

Lease Escalation Clause

A contract provision allowing for one to pass an increase in costs to another party. Escalation clauses are usually related to influences beyond both parties control, such as inflation.

A lower price

A higher cap rate will yield what...?

Anchor Stores

A key tenant in retail. Typically one of the larger stores in a shopping mall, usually a department store or a major retail chain (Macys, Nordstrom, etc.).

Percentage Lease

A lease of property in which the rental is based upon the percentage of the volume of sales made upon the leased premises, usually provides for minimal rental.

Gross Lease

A lease of property whereby the lessor is to meet all property charges regularly incurred through ownership.

Net Lease

A lease that requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by the property owner. These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items.

A higher price

A lower cap rate will yield what...?

Cash on Cash Return

A percentage return on money invested in a property by an investor. Formula: Cash Flow / Down Payment

Cash on Cash Return

A percentage return on money invested in a property by an investor. Formula: Cash Flow / Down Payment.

Rate of Return

A profit on an investment over a period of time, expressed as a proportion of the original investment.

Worth more

According to the 'Time value of money' concept, $1 today is worth what, as compared to $1 in the future...?

Pro-forma Statement

An accounting statement that forecasts income and expenses for a period of time, typically five or more years. Pro-forma statements are typically used by investors to estimate their rate of return for a particular property.

Estoppel

An instrument executed by the mortgagor setting forth the present status and the balance due on the mortgage as of the date of the execution of the certificate.

Debt Service

Annual amount to be paid by a debtor on an obligation to repay borrowed money.

Tax Shelter

Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.

The risk involved in the deal

As a commercial real estate owner, what should be your primary focus...?

5 units or more

At what size does a bank treat a residential building as commercial...?

Commercial property's value is based on this

Cash Flow or Net Income

Class A

David works in a newly built, high-rise office building. David most likely works in what Class of building...?

Rent roll

Document that shows which units are occupied and which are vacant

Leverage

Ely is a real estate syndicator. He pools together a group of investors to buy commercial investment properties. Ely's use of other people's money is an example of what...?

Net Operating Income

Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.

Net Operating Income - NOI

Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.

Higher Cap Rates

Higher interest rates will yield what...?

Positive Leverage

Interest Rate Lower than Cap Rate

Lower Cap Rates

Lower interest rates will yield what...?

3 or more

Mega malls consist of how many anchor tenants...?

Leverage allow an investor to

Purchase a larger building

Loft lease

Renting out the entire space or entire floor of a commercial space

These types of properties typically do NOT provide a strong return on an investor's money...?

Residential

Usable Square Footage

Space that can be used or occupied by a tenant. Typically does not include elevators, stairs, mechanical spaces, etc.

Common Areas

Spaces in a commercial building shared by the tenants or residents of the building. Common areas include lobbies, corridors, stairs, elevators, etc.

SNDA (Subordination,

Subordination - protects the landlord, tenant's rights will not supercede the rights that the bank has as the mortgagee of the building Non-disturbance - protects the tenant, if the lender would foreclose on the property, the bank would allow the tenant to stay on in the building Attornment - tenant allows the landlord to change ownership, tenant agrees to stay on the lease through the transfer

Commercial

The amount of cash flow a property produces is used to determine the value of this property type...?

Debt Service

The annual amount to be paid by a debtor on an obligation to repay borrowed money is known as what...?

Move-in Date

The commencement date is typically earlier than this date...?

Time Value of Money

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity is known as...?

Time Value of Money (TVM)

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Move-in Date

The landlord must be prepared to turn over the space to a new tenant by this date...?

Before Tax Cash Flow

The net profit/loss calculated by subtracting expenses from income before taxes are paid.

After Tax Cash Flow

The net profit/loss realized after taxes are deducted.

Capitalization Rate

The percentage which is the sum of the discount rate, the effective tax rate and the recapture rate representing the relationship between net operating income and present value. Formula: Value = Income / Rate

Capitalization (Cap) Rate

The percentage which is the sum of the discount rate, the effective tax rate and the recapture rate representing the relationship between net operating income and present value. Formula: Value = Income / Rate Inverse rektionship between cap rate and sales price Cap = NOI / Purchase Price Purchase Price = NOI / Cap Rate NOI = Purchase Price * Cap Rate

Emotions

The pricing of residential real estate is based, in part, on which of the following...?

Triple Net Lease

The tenant is responsible for all property expenses including real estate taxes, insurance, maintenance, repairs, utilities etc.

Double Net Lease

The tenant is responsible for property taxes and premiums

Gross Income

The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.)

Gross Income

The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.).

Leverage

The use or borrowed capital (mortgage) to increase the potential return of an investment.

Use clause

This clause in a commercial lease allows the landlord to restrict tenants from conducting certain business activities in their space, which may affect other tenants in the building....?

Commencement Date

This is the contracted date when the lease of a new tenant begins...?

Neighborhood Centers

This retail property type is typically 30,000 - 100,000 sq.ft...?

Outlet Centers

This retail property type typically consists of 1 - 2 anchor tenants...?

Strip Center

This retail property type typically consists of 8,000 - 30,000 sq.ft....?

Rentable Square Footage

Usable area that can be leased/rented to a tenant.

Anchor tenant

Walmart serves as the primary tenant in a large shopping center. Walmart can also be referred to as what...?

The amount of sweat equity needed to run the property successfully

What is an underlying component that contributes to an investor's decision as to what capitalization rate is appropriate for a particular property...?

Cash Flow / Down Payment

What is the formula for determining cash on cash return...?

Speak with a broker who specializes in that use Review recently signed leases for that use Research the asking rents of competing properties

When conducting their due diligence on a commercial property, how can an investor verify the market rents for a particular use...?

When the interest rate on the mortgage exceeds the cap rate

When does an owner have negative leverage in a deal...?

Cap Rate > Interest Rate

Which of the following equations will yield positive leverage in a deal...?

Risk

Which of the following is a primary characteristic of real property investments...?

Rentable square footage

Which of the following is the largest in area...?

The rentable square footage includes common areas The rentable square footage includes wall thicknesses The rentable square footage includes circulation

Why might the rentable square footage be greater than the usable square footage...?

Capitalization rate

calculate an investor's cash-on-cash return if the property is purchased using all cash

If an owner has enough cash to fund the operations of a commercial investment property while the cash flow becomes stabilized, he is considered this...?

liquid?